Industry needs policy support for sustained growth

SummaryOne should not expect a miracle to happen in the next two months to end the year with GDP growth touching 6% despite a 0.3- percentage-point drop in the base figure of 2011-12, from 6.5% earlier to 6.2%.

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One should not expect a miracle to happen in the next two months to end the year with GDP growth touching 6% despite a 0.3- percentage-point drop in the base figure of 2011-12, from 6.5% earlier to 6.2%. This drop was caused by the latest upward revision in GDP for 2010-11, from 8.4% earlier to 9.3%.

In fact, the number of downward risks associated with India’s economic growth is growing. Manufacturing growth has barely reached 1% in the first eight months of the current fiscal, contributed largely by demand contraction in the capital goods sector. The Purchasing Managers’ Index, which indicates market sentiment, is subdued for January 2013.

Gross fixed capital formation at current prices, a proxy for fresh investment, has been exhibiting a regular declining trend — from 32.3% of GDP in 2008-09 to 30.6% in 2011-12.

Around 50% of mega central projects are suffering from cost overruns, with the major ones belonging to the power, roads and highways sectors, where the PPP route was preferred to encourage private investment. Environmental clearance seems to be taking a toll on projects, with various social issues complicating matters.

Lower growth had an adverse impact on revenue collection, particularly excise and corporate taxes, and this also explains the low growth rate of GDP at market prices. As per data from the Reserve Bank of India (RBI), the total cost of sanctioned projects in Q2 fy12-13, at R521 billion, is nearly 26% lower than the figure for the corresponding period last year and more than 54% lower than comparable figures of 2010-11.

Data on more than 2,240 corporate houses, however, reveal that sales growth and net profit in Q2 of the current year have at least turned positive (0.9% and 17.8%) compared to Q1 figures. Also, a current account deficit of 5.4% of GDP in Q2 of the current year is indeed unsustainable. The saving grace is provided by the rise in foreign institutional investments, at $18.8 billion (April-January 2013), which is much higher than the previous year’s figure.

The large inflows of FIIs need to be sustained with continuous reforms and removal of investment barriers. However, FDI flows are preferable to a reliance on FIIs. The positive impact of the latest policy announcements in retail will likely unfold in the coming months.

A fresh dose of reforms, long overdue, is awaited during the presentation of this financial year’s Union Budget.